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With McAfee Deal, Intel Looks for Edge

SAN FRANCISCO — Hoping to accelerate its move into smartphones and consumer electronics, the chip maker Intel has turned to security software and services as a way to separate its products from those of its rivals.

On Thursday, Intel paid $7.68 billion to acquire McAfee, one of the leading sellers of antivirus and other computer security software. The companies, both based in Santa Clara, Calif., plan to create tight links between Intel’s chips and McAfee’s security technology.

Such ties will be crucial as millions of products, including phones, cars and home appliances, gain more computing horsepower and access to the Web, according to the chief executive at Intel, Paul S. Otellini.

The entrance to Intel’s campus in Hillsboro, Ore. Intel’s move to buy McAfee is its biggest effort to date to expand beyond its core chip-making business.Credit
Don Ryan/Associated Press

Investors appeared flummoxed by the purchase, Intel’s biggest ever, sending the company’s shares down about 3.5 percent, to $18.90, in afternoon trading. McAfee shares rose 57.07 percent, to $47.01.

With the purchase, Intel is spending a huge chunk of the $12.2 billion in cash and short-term investments it had on hand as of last quarter. Analysts expect that other technology companies sitting on large cash hoards, like Microsoft, Apple, Cisco and Google, are primed to make more major acquisitions, though some analysts have urged the companies to give shareholders some of the money in dividends.

Analysts doubted that McAfee’s business would have much near-term impact on Intel’s bottom line.

Intel’s fortunes are tied to PCs and the computer servers that go into data centers. As such, Intel, with revenue of $35.1 billion in 2009, goes through boom-and-bust cycles as demand waxes and wanes. McAfee, with revenue of $1.93 billion last year, sells a great deal of software on a subscription basis, which can smooth out financial results from quarter to quarter and year to year.

“There are no immediate synergies that I can see,” said Stacy A. Rasgon, an analyst with Sanford C. Bernstein & Company. “It is a strategic deal, and it is a pretty rich price for a strategic buy.”

Paul S. Otellini, the chief executive of Intel. The company is increasing its presence in the software security market.Credit
Justin Sullivan/Getty Images

Demand for McAfee’s core security products should rise as people look to protect their smartphones, cars and Web-ready products from Internet threats, said David G. DeWalt, the chief executive at McAfee. Consumer electronics products like phones and hand-held gadgets face fewer threats than PCs, although it is expected they will be subjected to the same torments from hackers as they gain access to the Internet.

McAfee has 17.7 percent of the market for securing computing devices, trailing the market leader Symantec, which has 36.2 percent, according to the research firm IDC. In the last couple of years, McAfee has gained ground on Symantec by signing a large number of deals with PC makers and Internet service providers to offer its security software to consumers and workers.

Intel already builds a number of security hooks into its chips. These tools can help block malicious software from disrupting a computer or give a technician the ability to fix a computer from a remote location. The purchase of McAfee would give Intel access to more security specialists and the ability to hardwire more of these types of tools into its chips.

Still, analysts noted that Intel spent plenty to obtain these security skills. “Eventually the software features will get embedded in the hardware,” said Ashok Kumar, a technology analyst with Rodman & Renshaw. “So maybe this is an expensive way for Intel to acquire domain expertise.”

With its share price stagnant for years, Intel has been hunting for growth outside of the PC and computer server markets. In particular, Intel has decided to go after the smartphone and consumer electronics segments, which are dominated by rival chip designs.

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David G. DeWalt, head of McAfee, expects demand to rise.Credit
Scott Eells/Bloomberg News

Intel’s growth push has been met with resistance, largely because its chips remain more expensive and power-hungry than those of rivals.

McAfee will operate as an Intel subsidiary, reporting to Renée J. James, the head of Intel’s software and services group.

In an interview, Ms. James declined to provide details on how Intel products would gain an edge over the competition through the McAfee technology.

She has led Intel’s transformation into a software powerhouse.

Last year, Intel bought Wind River for $884 million, giving it a software maker that played in the consumer electronics and wireless markets. Earlier, Intel purchased Havok, a company that provided software tools to video game makers.

Intel and Nokia also work together on the MeeGo operating system for smartphones and other consumer electronics devices, placing the companies in competition with Apple, Google and Microsoft.

Michael J. de la Merced contributed reporting from New York.

A version of this article appears in print on August 20, 2010, on page B1 of the New York edition with the headline: With McAfee Deal, Intel Looks for Edge. Order Reprints|Today's Paper|Subscribe